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Canadian Housing Bubble Growing

A housing bubble has been on the lips of Canadians for many years. But during the pandemic, the housing crisis has grown immensely making the issue unavoidable. Unfortunately, things will get worse before they get better. Economic experts forecast housing prices will continue to skyrocket in 2022. Even worse, there could be a housing market crash, potentially causing a recession. The Bank of Canada, the central bank, has not increased their prime rate. This is one of the various factors contributing to the Canadian housing market bubble.

What is a housing bubble?

A housing bubble is a rise in real estate sale prices caused by increases in demand, speculation and overspending. Housing bubbles are sometimes called real estate bubbles. Often, housing bubbles begin with a rise in demand and limited supply. Both demand and limited supply tend to increase prices in a market. Once people begin to see the increase in prices, they believe real estate investments are lucrative and spend more in the market. This causes more demand and continuing limited supply. People believe that success will continue in the market indefinitely. This further fuels activity in the market.

What causes housing bubbles?

A housing bubble is an upward, unsustainable spiral in housing market prices. In the beginning, they start off with basic economic principles: high demand and restricted supply. In Canada’s housing market, high demand is being caused by low-interest rates. Once people in the market notice the rising housing prices, that’s where the trouble begins. People believe the price increases will continue indefinitely. This motivates people to pour more and more money into the market with the efforts of earning a profit.

The crux of housing bubbles is a phenomenon called the hot hand fallacy. This is a psychological condition where people believe a person or thing is “hot” or “cold” depending on past performance. For example, let’s say you’re at a casino. You just placed a bet where you earned $1,000. You believe you’re “hot” and will continue to win on every bet you place. In reality, casinos have high odds of losing for the players, but this is not the way humans think. Instead, you decide to place a big bet assuming you’ll continue to win, but lose everything.

In housing bubbles, the exact same thing happens. People pump money into the housing market because they believe they will make tons of money on their investments. However, when everyone does this, the housing market actually becomes unstable.

What happens when a housing bubble bursts?

When a housing bubble bursts, real estate becomes overvalued. This means housing prices decrease rapidly. Anyone who owns real estate in the market may incur negative equity as a result. Negative equity means the value of your asset is less than what you owe against it. This can cause destruction in an economy because people are paying a ton of money for an asset that isn’t worth the same or more. If someone were to sell their house, the proceeds may not cover the remainder of their mortgage. Then, they’d have to cover the remainder of the mortgage on their own.

How did the housing bubble start?

Talk of a housing bubble in Canada, specifically Toronto and Vancouver, has been going on for some time. However, these things don’t happen overnight. In the last 20 years, home prices have gone up by 375% in Canada. In Toronto and Vancouver, the prices have increased by 450% and 490% respectively.

It’s hard to pinpoint exactly when the housing bubble began in the last 20 years. It likely started in the 2000s, but really took off in the 2010s. Either way, this has been a long-term issue. You might be wondering why Canada hasn’t put the housing bubble in check. Especially considering the 2008 Financial Crisis. This economic recession was the result of a housing bubble. More specifically, deregulation in the financial industry, such as no income verification, hedge fund trading with derivatives and low rates of borrowing. The United States had an economic reset from the 2008 Financial Crisis. Unfortunately, Canada did not have the same experience. This is why our housing market is likely to suffer from a housing bubble too.

More than half of Canadian households couldn’t buy a home today

Statistics show that an average home today costs just under $800,000. This is about 28% higher than the cost one year ago. When you compare this to average annual incomes, over half of the Canadian households could not afford to buy a home today. In order for more households to qualify for a mortgage, they would need to raise their income by 88%. This is considering both saving for a downpayment and making a monthly mortgage payment. For better or worse, mostly young people and single-family households are the victims of this housing affordability issue. Half of Canada already owns a house but is part of the older demographics.

National Price Map


Canadian HELOC borrowing is skyrocketing

Home Equity Line of Credit (HELOC) debt is out of control in Canada. Currently, the HELOC debt load is at $166.8 billion as of October 2021. At the beginning of the pandemic, people began paying down their debts, including HELOCs. This was likely due to financial panic and the economy flooding with money thanks to federal government emergency support. But now, Canadians are essentially back to square one – overly relying on HELOC debt.

Canadian loans secured by housing reaching high amounts

In the past five years, more and more Canadian loans had housing collateral. This is alarming because it may be an indicator of overleveraged national housing. Should the housing market collapse, many Canadians will owe more than they own.

Inflation is behind home price growth

Another economic worry on the minds of Canadians is inflation. The price of basic necessities like food, gas and utilities has been increasing. However, the rate of inflation is increasing less than home price growth. This is only beneficial to homeowners with mortgages. If an asset’s value is rising at the rate of inflation, or more, then you’re essentially borrowing money for free.

Housing prices to keep rising in Canada

Unfortunately, the Canadian housing market bubble will continue into 2022. Both inflation and the housing bubble are causing rising housing prices. This will be frustrating particularly for young home buyers. 

How can we help keep your debt in order?

Instability in the Canadian economy is nearly everywhere. You may notice the trends trickling down into your personal finances. Whether or not you’re in financial trouble, you may want some help keeping your debt in line. Consolidated Credit’s team of experts can assist. Reach out for a consultation today!

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